Mesirow Advanced Strategies Inc., which allocates $14 billion to hedge funds, has been increasing the amount of cash it holds in the last couple of months in preparation for potential opportunities including those in the European credit markets.
“What we want to have is the flexibility that if particular things do deteriorate, we can play offense relatively quickly, being able to put capital to work in interesting opportunities,” Marty Kaplan, chief executive officer of the Chicago-based fund of hedge funds manager, said in an interview.
European banks are under pressure to shrink their balance sheets, reduce risk and raise capital to withstand writedowns as the region’s debt crisis worsens and to comply with new regulatory capital requirement. Hedge funds including Och-Ziff Capital Management Group and Marathon Asset Management LP have said they’re awaiting opportunities to buy assets.
European banks may sell stressed and distressed assets, ranging from performing loans of lower quality to distressed loans across a variety of industries to reduce their borrowings, said Greg Fedorinchik, a Chicago-based senior managing director heading Mesirow’s global client relationship team. Both officials declined to quantify the increases in cash holdings.
The European Banking Authority in December ordered banks to raise 115 billion euros ($146 billion) by June. Banks across Europe have announced plans to trim more than 950 billion euros of assets from their balance sheets over the next two years, according to data compiled by Bloomberg.
Kaplan said Mesirow may also deploy more capital to relative-value strategies such as capital structure arbitrage, which seeks to profit from mispricing of different securities sold by the same company.
Mesirow has redeemed out of some strategies that take more directional views on the markets, such as long-biased equity and event-driven hedge funds that bet on corporate activities such as mergers and acquisitions.
“As the situation in Europe deteriorates, right now you don’t see tons of corporate activities because confidence in board rooms has declined,” Kaplan said.
Mesirow generally favors credit over equities strategies, said Kaplan, and prefers structured credit, which tends to be mortgage-backed, over corporate credit.
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